FLEX LNG: The journey from LNG innovator to spot market player

The technology involved in the seaborne transportation of LNG develops quickly. FLEX LNG embodies just how quickly, writes Craig Jallal

FLEX LNG was founded on a unique concept of using offshore liquefaction and transportation of LNG from marginal gas fields. Now, 12 years later, it is in the mainstream of LNG seaborne transportation.

FLEX LNG was founded in 2006 and floated on the Oslo Axxes, the junior board of the Oslo Stock Exchange, to develop its proposed multi-purpose 170,000 m3 M-FLEX LNGP carrier: a combined conventional LNG carrier, floating storage and regasification unit (FSRU) and floating production, storage and offloading (FPSO) vessel.

Four M-FLEX LNGPs were ordered from Samsung Heavy Industries at a reported cost of US$459M each (approximately twice the price of a standard vessel at the time), with delivery scheduled for 2011. However, by 2010 and with the global financial crisis in full swing, FLEX LNG was struggling to raise finance and attract interest in its concept.

In 2013 Samsung declared to the South Korean Stock Exchange that the project had collapsed. FLEX LNG persuaded the yard to switch the order to a pair of conventional 174,000 m3 LNG carriers, paying a reported US$210M per vessel from the original down payments.

This announcement was followed by the news that Norwegian energy transportation sector investor John Fredriksen had purchased a stake in FLEX LNG through his private investment vehicle, Geveran Trading.

Mr Fredriksen sold his shares in his other LNG venture, Golar LNG, and today indirectly holds 52% of FLEX LNG. Following Mr Fredriksen’s takeover, FLEX LNG converted the two 174,000 m3 LNG carriers on order at Samsung to MEGI engines, from DFDE propulsion systems. A third LNG carrier was ordered from Samsung and Mr Fredriksen brought in Jonathan Cook*, the former chief marketing officer of TMS Cardiff Gas, to head up FLEX LNG. At about this time, the remaining founders of FLEX LNG stepped down.

In 2017 FLEX LNG moved to the main board of the Oslo Stock Exchange, raising US$200M. As with other John Fredriksen companies, the non-core activities are outsourced. The management of FLEX LNG is provided by a separate limited company, FLEX LNG Management Limited. As at the end of 2017, Bermuda-registered FLEX LNG Ltd had only two employees.

In what is almost a signature move for Mr Fredriksen, his private company, Geveran Trading, sold two M-type electronically controlled gas injection (MEGI)-engined LNG carrier newbuildings on order at DSME to FLEX LNG. FLEX LNG paid for the vessels by issuing 78M new shares to Geveran Trading and raising US$100M via a private placement. FLEX LNG took on the remaining US$20.4M debt on the newbuildings.

Thus, in a relatively short space of time, FLEX LNG was transformed from an innovative LNG carrier start-up into a conventional operator of LNG carrier companies, albeit of the latest generation.

The fleet was reinforced by further orders from either Mr Fredriksen’s private entities or directly by FLEX LNG, but supported by funds underwritten by Mr Fredriksen.

The company took delivery of its first two LNG carriers in January 2018 and there are another six under construction: two at Samsung, two at DSME and two at Hyundai Samho, with deliveries scheduled for between 2018 and 2020. As things now stand, by the end of 2019 FLEX LNG will have a fleet of eight near-identical, latest-generation LNG carriers.

All eight have two-stroke propulsion systems of either the MEGI or XDF (low pressure gas, dual fuel technology) type. FLEX LNG claims the ships will be among the most fuel-efficient and technically advanced LNG carriers in the world, with around 30% lower fuel consumption than tri-fuel diesel electric propulsion (TFDE) vessels.

Before taking delivery of the first newbuilding in January 2018, FLEX LNG had taken several LNG carriers on various short-term charters. The stated aim is to build up commercial and operational experience.

FLEX LNG does not name the LNG carriers chartered-in, but according to brokers, these are believed to be the 2013-built Yenisei River, the 2013-built Lena River and the 2014-built Pskov.

The aim of the revised FLEX LNG of 2018 is clear – to be a leading operator of the latest generation of LNG carriers available on the spot market. FLEX LNG emphasises that its fleet offers charterers the lowest fuel costs and, by extension, the lowest unit transport costs.

However, it remains the case that FLEX LNG is essentially a start-up, with only two vessels in the water: one on a 12-month charter (with option for another 12 months) and the other on the spot market. In Q1 2018 the company reported a turnover of US$15M, and a loss of US$1.8M.

The company continues to be heavily underwritten by Mr Fredriksen and it is his presence that likely gave comfort to the banks, which have provided a term loan with some very flexible covenants. Under the terms of the US$315M loan, which is to finance the first three newbuildings, FLEX LNG can swap the collateral base without incurring costs. Thus, one of the three newbuildings could be sold on a sale and leaseback basis, and another vessel substituted as collateral. It would allow that un-drawdown part of the loan to be used to finance another newbuilding.

Another flexible aspect of the loan is that the financial covenants are not linked to earnings, as FLEX LNG is geared toward the spot market and is not looking to lock away the vessels on 10-15 year time charters. Rather, the covenants rely on the balance sheet values of book equity level exceeding 25% and free cash being higher than US$15M. The combination of there being no requirement of employment and non-earnings-based covenants allows FLEX LNG to take an opportunistic approach, designed to maximise exposure to periods of strength in the LNG carrier rate environment.

Seeking employment in the spot market does however expose the company to fluctuating earnings, and FLEX LNG has secured working capital through a US$270M revolving credit facility from Sterna Finance Ltd, an affiliate of Geveran Trading. Again, this gives FLEX LNG flexibility to seek alternative loans should the company wish to pursue other newbuilding projects, such as FSRUs.

This is very much on the company’s agenda. The corporate brochure states “FLEX LNG is selectively pursuing various opportunities in the FSRU market.” And while FLEX LNG currently has no FSRUs on order, and nor do any companies in the John Fredriksen group, that is not a barrier to entry, given the available resources of the main shareholder. It seems to be a question of when, not if.

*Following the recent resignation of Jonathan Cook to pursue other interests, Marius Hermansen has been appointed interim chief executive, while Marius Foss has been hired as head of commercial. Mr Foss comes from a similar role at Golar LNG Ltd.